Austrians and MMTers should be on the same side

Austrians and MMTers should be on the same side. After all, both camps understand the relationship between money and credit, and both understand the full ramifications of having fiat money. They should be on the same side arguing against economists who argue that demand can be created by flooding the banking system with reserves, and both should be on the same side arguing against those who think that increasing inflation expectations is an effective way to get an already over-indebted economy to take on more debt.

As it turns out, these two groups are the most ardent critics of each other, thereby giving the mainstream enough bullets to shoot both of them both down with each other’s bullets. MMTers are shot down with the branding that they don’t care about inflation, while Austrians are shot down with being crazy gold bugs.

As I see it, both have a good understanding of monetary transmission, except each follows this understanding to two of its logical outcomes. Austrians believe that having fiat money in the economy will lead to continuous malinvestments, endless bubbles, and will eventually destroy the credibility of the currency. MMTers embrace fiat, and believe that it is precisely the government’s ability to spend fiat that enables it to offset the private sector’s need to save, to take over when the private sector is deleveraging, restructuring, or just plain fearful of investment, so that the economy does not spiral into cascading deflation.

MMTers are different from the mainstream because they distinguish between fiat being used to fuel government spending, which translates into actual income for the economy, and fiat being issued just to encourage people to spend today what they would otherwise spend at some future date. MMTers recognize that when a person is devoid of income, no amount of inflationary push will nudge him to spend money he does not have, or borrow money that no lender will ever prudently provide him.

But MMTers, just like Austrians, recognize that having fiat money could lead the private sector to extend more credit than is prudent during a boom, and this excess lending eventually leads to a ponzi scheme where the last person holding the now bust asset is unable to pay his debt, and the last person holding the bad debt loses his ability and compunction to lend some more.

Austrians, however, prescribe that the best way to handle a bust is to let it take its natural course, so that people who made bad investments lose, and those who plan to invest do so when the economy settles at a stable floor. MMTers, on the other hand, do not believe it logical for government to leave a private sector bust to itself, precisely because people who have just lost income will not be the right ones to start spending again, and investors who just lost equity are not the best ones to start investing again.

But regardless, both can look at the economy granularly, and see debtors and creditors, investors and investees. Mainstreamers only see buyers and sellers, and believe that just dropping money will solve the problem of non-existent buyers. Mainstream do not see how this money will be transmitted from fiat issuer to end consumer without aggravating consumer’s already heavy debt load. There is no such thing as balance sheet recession to the mainstream, no such thing as leveraging and deleveraging.

Austrians and MMTers see this dynamic, and so should take a common stand against the mainstream who can easily shoot them both down like fleeing rabbits. For my part, though, while I see how Austrians see the dangers of fiat, and therefore want to take it away from those who can issue it – from the government, by going back to the gold standard, and from the banks, by advocating a 100% reserve lending, I don’t share the same prescription.

As I’ve mentioned it previous posts, I don’t believe the gold standard is apt to our current level of economic development and population. I don’t believe 100% reserve lending addresses the needs of today’s economic reality, or ever did the reality of a growing economy at any time in the past. And I also believe that recessions cannot be left alone, particularly when private businesses are no longer willing or able to do their regular job of investing, producing, hiring, and selling. I do believe though that government should support a more organic revival of the private sector by supporting the local businesses who hire the most people in aggregate. It should also respect that a recession is the best way also to reverse and break the previous boom’s tendencies towards monopoly and concentrated market power. Government should not use fiat spending to perpetuate that status quo.

Fiat is now the reality. The best way to control politicians and bankers from abusing it is to strictly enforce macroprudential monitors and controls.

Rogue Econ has been a banker and financial consultant in several countries. He writes a blog called Rogue Economist Rants.

I am no Austrian or MMTer, but I do agree with the Austrians that you should allow markets to take their natural course. Let moral hazard become a major part of the economy again. It will help stop bubbles inflating, if people know that they could lose everything they might be much more careful. Banks should be allowed to fail, though their branch networks should be nationalised, sold off to new entrants so that the public will always have a local branch network, and that competition can be increased.

I regard myself as a Keynesian but can see that leverage is a serious problem. Unlike the mainstream you need to have long term unemployment benefits to allow markets to adjust and once the de-leveraging has completed, and only then governments should stop in with stimulus, in a way that will create jobs. There could be a case for an increase in taxes at the start of the recession to make up for any drop in revenues. For example I would target capital gains as these are under taxed areas and are a key component of bubbles. This would mean government deficits from the collapse in revenues are lower and that those that benefited from the bubbles would be paying the most according to their gains.

I would also not even contemplate zero interest rates. I would have a floor to interest rates of 3 or 4%. This would help bubbles continue their deflation. As it stands people are holding on to see if they can get through this crisis intact. The only eliminates moral hazard.

Only the very rich have the means to get loans currently as banks have stopped lending to all but the most creditworthy anyway. This would exclude the need for QE to create asset bubbles somewhere else.

I agree with you, David that a market orientation i.e. no bailout is better. It was interesting to see what the writers of the LDC crisis put up though. Very good post.

I disagree here that Austrians “understand the full ramifications of having fiat money.” That is the crux of the problem. I will address that my self in a later post.

DavidLazarusUK says 8 years ago

Like you I have no support for the gold standard or its limitations. Fiat money is not a problem if governments are willing to stop in and raise taxes when necessary. Currently I doubt that there are many economists that even think that tax raising is even on the table. All are supply side minded and only think in terms of tax cutting to stimulate demand.

Mainstream economists currently define Keynesians as tax and spenders to boost demand. Most big economies resorted to stimulus packages to try and rescue the economy, To a greater or lesser success.

Though Keynes was in favour of government surpluses to eliminate any excessive demand in an economy, which many mainstream economists forget. Politicians are reluctant to step on the brakes if the economy is going well. In which case the central bank should raise interest rates to kill off demand in such circumstances.

“Fiat money is not a problem if governments are willing to stop in and raise taxes when necessary. Currently I doubt that there are many economists that even think that tax raising is even on the table. All are supply side minded and only think in terms of tax cutting to stimulate demand. ”

You’re right, David, and this is why we need to advance discussion on this relatively new understanding of the financial system, so governments do not enforce cures that only exacerbate the disease, stimulate with measures that kill demand, moderate a bubbles with measures that feed it.

DavidLazarusUK says 8 years ago

I have very little faith in sensible solutions being used. Politiicians are still wedded to the idea of low taxes stimulating the economy, though they have almost abandoned the trickle down theory that comes with it. Supply side economists are one trick ponies who are out of their depth most of the time. The problem is that we are fundementally driven by demand which they ignore. Businesses go where the demand is.

When the UK coalition came into power, it basically said that the previous administration overspent so the only solution was to cut spending. Well as Keynesians would have told them this sucks demand out of the economy and forces it to slow down. The coalitions response was look at Canada that carried out austerity and see how well they did. Though Canada was doing it’s measures when it’s major partner the US was growing. A better example is Ireland, who after three years are still in recession and the population are emigrating faster than any period since the potato famine.

As for long term solutions bank reform is still the number one factor. Until that happens I think that the economy is doomed. We might all limp along for a few years before another major crisis happens. At this point the supply siders will be confused as their policies are not working. I think that it will take another global financial crisis before most economists abandon supply side economics.

Anonymous says 8 years ago

many MMT’ers are finding that raising rates actually fuels inflation further through savings interest and price channels not to mention it is a blunt instrument with serious lag.

when you speak of “supply” what type of supply are you referring to? It seems that we have a supply of workers with no jobs and business is down b/c of consumption which is down b/c of demand which is down b/c of deleveraging. Cutting taxes like FICA would increase private nfa which would greatly support and speed up the deleveraging process and allow demand to pick up again. What value does raising taxes have in this scenario?

DavidLazarusUK says 8 years ago

Supply side economists think that if you solve the problems that constrain supply of goods and services then everything will be better. Hence they concentrate on regulations. Many of these regulations are there for a very good reason. The problem is that someone inevitably face higher costs elsewhere. For example, defunding the EPA might reduce costs for companies polluting but what happens is that the real costs of pollution are imposed on everyone else in terms of reduced health and higher health care costs.

Another would be more people would be offered mortgages if the regulations were less, such as how we sell them. I think that we all know how badly these turned out.

Anonymous says 8 years ago

oh well yes. Not only do I agree with that but actually so do many MMT’ers. This is one area of “cross-over” between Aust and MMT. Some people say we are in a balance sheet recession where much deleveraging is going on in the private sector. Increasing supply has nothing to do with it. This is why many MMT’ers support tax cuts to increase private nfa basically immediately (a FICA holiday would do that). This is a very valuable aspect of MMT…the way MMT understands fiscal policy and how it relates to the economy. We are grossly over-taxed considering the state of our economy today.

Funnily enough reserves act in a similar way to your supply side argument. Boosting reserve amounts (increasing supply) does not actually accomplish anything for the economy at large b/c if there is no demand it doesn’t matter how many reserves we have…there’s no demand.

I am not sure but I think that many Austrians don’t understand this about reserves. They feel that the money supply has been growing since QE started. This is not true b/c all that took place were asset swaps in reserve accounts from bonds to cash. Now yes that cash probably went to boost up another bubble in stocks or comms but that is not really the same thing as increasing the money supply and flooding the economy with dollars as many people purport. I don’t support that activity but still that’s a far cry from anything like hyper-inflation. But I could be generalizing Austrians. Let me know if I am please.

I am still convinced there is much that Austrians and MMT’ers actually do agree on in terms of business cycles, regulation, and supporting demand and nfa and keeping inflation in check too. MMT is not about printing money and inflation…not at all. Thanks for responding too David. Much appreciated.

DavidLazarusUK says 8 years ago

I am not worried about hyper inflation. Also increasing bank reserves as you say will not increase lending but that would not be my objective. The objective is to make banks safer. More able to withstand a shock. If you increase banks reserve requirements it will not lead to loan growth because there simply is not the demand from businesses or individuals for loans at the moment. If banks say that they will cut the numbers of loans to comply with this new requirement, fine. The deleveraging needs to continue and so calling in loans will get there quicker. Some banks will increase capital so that they can maintain their business relationships with their customers, and grow in relation to other banks. Ultimately banks are an ego thing so they will raise capital to maintain their relative size.

Anonymous says 8 years ago

I am no Austrian or MMTer, but I do agree with the Austrians that you should allow markets to take their natural course. Let moral hazard become a major part of the economy again. It will help stop bubbles inflating, if people know that they could lose everything they might be much more careful. Banks should be allowed to fail, though their branch networks should be nationalised, sold off to new entrants so that the public will always have a local branch network, and that competition can be increased.

I regard myself as a Keynesian but can see that leverage is a serious problem. Unlike the mainstream you need to have long term unemployment benefits to allow markets to adjust and once the de-leveraging has completed, and only then governments should stop in with stimulus, in a way that will create jobs. There could be a case for an increase in taxes at the start of the recession to make up for any drop in revenues. For example I would target capital gains as these are under taxed areas and are a key component of bubbles. This would mean government deficits from the collapse in revenues are lower and that those that benefited from the bubbles would be paying the most according to their gains.

I would also not even contemplate zero interest rates. I would have a floor to interest rates of 3 or 4%. This would help bubbles continue their deflation. As it stands people are holding on to see if they can get through this crisis intact. The only eliminates moral hazard.

Only the very rich have the means to get loans currently as banks have stopped lending to all but the most creditworthy anyway. This would exclude the need for QE to create asset bubbles somewhere else.

I agree with you, David that a market orientation i.e. no bailout is better. It was interesting to see what the writers of the LDC crisis put up though. Very good post.

I disagree here that Austrians “understand the full ramifications of having fiat money.” That is the crux of the problem. I will address that my self in a later post.

Anonymous says 8 years ago

Like you I have no support for the gold standard or its limitations. Fiat money is not a problem if governments are willing to stop in and raise taxes when necessary. Currently I doubt that there are many economists that even think that tax raising is even on the table. All are supply side minded and only think in terms of tax cutting to stimulate demand.

Mainstream economists currently define Keynesians as tax and spenders to boost demand. Most big economies resorted to stimulus packages to try and rescue the economy, To a greater or lesser success.

Though Keynes was in favour of government surpluses to eliminate any excessive demand in an economy, which many mainstream economists forget. Politicians are reluctant to step on the brakes if the economy is going well. In which case the central bank should raise interest rates to kill off demand in such circumstances.

“Fiat money is not a problem if governments are willing to stop in and raise taxes when necessary. Currently I doubt that there are many economists that even think that tax raising is even on the table. All are supply side minded and only think in terms of tax cutting to stimulate demand. ”

You’re right, David, and this is why we need to advance discussion on this relatively new understanding of the financial system, so governments do not enforce cures that only exacerbate the disease, stimulate with measures that kill demand, moderate a bubbles with measures that feed it.

Anonymous says 8 years ago

I have very little faith in sensible solutions being used. Politiicians are still wedded to the idea of low taxes stimulating the economy, though they have almost abandoned the trickle down theory that comes with it. Supply side economists are one trick ponies who are out of their depth most of the time. The problem is that we are fundementally driven by demand which they ignore. Businesses go where the demand is.

When the UK coalition came into power, it basically said that the previous administration overspent so the only solution was to cut spending. Well as Keynesians would have told them this sucks demand out of the economy and forces it to slow down. The coalitions response was look at Canada that carried out austerity and see how well they did. Though Canada was doing it’s measures when it’s major partner the US was growing. A better example is Ireland, who after three years are still in recession and the population are emigrating faster than any period since the potato famine.

As for long term solutions bank reform is still the number one factor. Until that happens I think that the economy is doomed. We might all limp along for a few years before another major crisis happens. At this point the supply siders will be confused as their policies are not working. I think that it will take another global financial crisis before most economists abandon supply side economics.

Anonymous says 8 years ago

many MMT’ers are finding that raising rates actually fuels inflation further through savings interest and price channels not to mention it is a blunt instrument with serious lag.

when you speak of “supply” what type of supply are you referring to? It seems that we have a supply of workers with no jobs and business is down b/c of consumption which is down b/c of demand which is down b/c of deleveraging. Cutting taxes like FICA would increase private nfa which would greatly support and speed up the deleveraging process and allow demand to pick up again. What value does raising taxes have in this scenario?

Anonymous says 8 years ago

Supply side economists think that if you solve the problems that constrain supply of goods and services then everything will be better. Hence they concentrate on regulations. Many of these regulations are there for a very good reason. The problem is that someone inevitably face higher costs elsewhere. For example, defunding the EPA might reduce costs for companies polluting but what happens is that the real costs of pollution are imposed on everyone else in terms of reduced health and higher health care costs.

Another would be more people would be offered mortgages if the regulations were less, such as how we sell them. I think that we all know how badly these turned out.

Anonymous says 8 years ago

oh well yes. Not only do I agree with that but actually so do many MMT’ers. This is one area of “cross-over” between Aust and MMT. Some people say we are in a balance sheet recession where much deleveraging is going on in the private sector. Increasing supply has nothing to do with it. This is why many MMT’ers support tax cuts to increase private nfa basically immediately (a FICA holiday would do that). This is a very valuable aspect of MMT…the way MMT understands fiscal policy and how it relates to the economy. We are grossly over-taxed considering the state of our economy today.

Funnily enough reserves act in a similar way to your supply side argument. Boosting reserve amounts (increasing supply) does not actually accomplish anything for the economy at large b/c if there is no demand it doesn’t matter how many reserves we have…there’s no demand.

I am not sure but I think that many Austrians don’t understand this about reserves. They feel that the money supply has been growing since QE started. This is not true b/c all that took place were asset swaps in reserve accounts from bonds to cash. Now yes that cash probably went to boost up another bubble in stocks or comms but that is not really the same thing as increasing the money supply and flooding the economy with dollars as many people purport. I don’t support that activity but still that’s a far cry from anything like hyper-inflation. But I could be generalizing Austrians. Let me know if I am please.

I am still convinced there is much that Austrians and MMT’ers actually do agree on in terms of business cycles, regulation, and supporting demand and nfa and keeping inflation in check too. MMT is not about printing money and inflation…not at all. Thanks for responding too David. Much appreciated.

Anonymous says 8 years ago

I am not worried about hyper inflation. Also increasing bank reserves as you say will not increase lending but that would not be my objective. The objective is to make banks safer. More able to withstand a shock. If you increase banks reserve requirements it will not lead to loan growth because there simply is not the demand from businesses or individuals for loans at the moment. If banks say that they will cut the numbers of loans to comply with this new requirement, fine. The deleveraging needs to continue and so calling in loans will get there quicker. Some banks will increase capital so that they can maintain their business relationships with their customers, and grow in relation to other banks. Ultimately banks are an ego thing so they will raise capital to maintain their relative size.

100% reserve lending definitely does not address the problem. It crashes the economy. However, the basic concept that you need to save first to increase investment is where I see the problem with MMT and Austrian economics. MMT solutions are monetary solutions. Austrians say no monetary solution will ever make up for that fact that in order to grow, you need to invest. In order to invest, you need to increase capital. In order to increase capital, you have to forgo consumption.

We’re not Robinson Crusoes here, but aggregately, we still are. Even if you propose a 100% jobs program, it takes capital to implement it. It does not come from nowhere. The old sticks in the mud won’t let go of this one.

Anonymous says 8 years ago

Reserve amounts are meaningless without borrowers. There could be trillions of dollars in reserves and it would mean NOTHING to our economy if no one was borrowing. This is why operationally QE2 is not “printing money” the way most people think.

What do you mean by “MMT soluations are monetary solutions”? I know for a fact that many MMT’ers support ending most monetary policy operations, they have tons of ideas in regards to regulation, and support tons of various fiscal policies and programs. I mean aren’t all economic solutions eventually at some point “monetary solutions”?

100% reserve lending definitely does not address the problem. It crashes the economy. However, the basic concept that you need to save first to increase investment is where I see the problem with MMT and Austrian economics. MMT solutions are monetary solutions. Austrians say no monetary solution will ever make up for that fact that in order to grow, you need to invest. In order to invest, you need to increase capital. In order to increase capital, you have to forgo consumption.

We’re not Robinson Crusoes here, but aggregately, we still are. Even if you propose a 100% jobs program, it takes capital to implement it. It does not come from nowhere. The old sticks in the mud won’t let go of this one.

Anonymous says 8 years ago

Reserve amounts are meaningless without borrowers. There could be trillions of dollars in reserves and it would mean NOTHING to our economy if no one was borrowing. This is why operationally QE2 is not “printing money” the way most people think.

What do you mean by “MMT soluations are monetary solutions”? I know for a fact that many MMT’ers support ending most monetary policy operations, they have tons of ideas in regards to regulation, and support tons of various fiscal policies and programs. I mean aren’t all economic solutions eventually at some point “monetary solutions”?

Please explain further.

Anonymous says 8 years ago

I’m in the MMT camp, but I also believe that having fiat money in the economy CAN lead to continuous malinvestments and endless bubbles. It’s just that I view this as a purely political problem, not a monetary problem.

If the people don’t like how their government chooses to spend, the solution is to elect new leaders, not to change the monetary system in hopes of creating meaningful fiscal/monetary restraint. As long as we elect politicians who support endless war and powerful banking cartels, we will get endless war and powerful banking cartels, regardless of whether our currency is fiat or backed by gold.

Anonymous says 8 years ago

ummm….do people really think bad investments cannot happen under a gold standard or something? I really feel as if people aren’t thinking logically with this stuff. Having a gold standard only shrinks the money supply and thereby only makes the bad investments which WILL HAPPEN that much worse b/c there will be even more constraint on funds and liquidity and fiscal power. I’d love to hear an Austrian counter these functional REALITIES somehow….

No-one implies that bad investments cannot be made under a gold or commodity standard. My own view is that bail-outs become infinitely harder as The Government cannot do its usual magic.

By allowing failure to happen (more) frequently you ward off the all-out system collapse that comes at the end of a multi-decade credit/bailout boom. Also there is the factor that as credit money is destroyed by defaults etc., the cost of money is more likely to increase due to market forces rather than decrease due to government interaction.

Where no entity controls the supply of money – say a gold or a pure credit money system – we are assured of smaller, more frequent bush-fires rather than the all-out combustion of the majority of the forest.

Anonymous says 8 years ago

thanks for your reply Ebipere. However I don’t think you realize that your argument keeps jumping back and forth and you actually back-pedal on yourself into contradiction.

First you state that you admit that bad investments (aka bubbles and crashes) can still be made under a gold standard. However once you admit that you then just dive right back into that same type of thinking and say that imposing a constraint allows us to “ward off the all-out system collapse that comes at the end of multi-decade credit/bailout boom.” Umm…you just contradicted yourself.

Do you think that a bubble and/or crash is “better” under a gold standard or “better” under a fiat system? Trick question!! They are both bubbles and crashes!! It’s like that question, “which is heavier…a pound of bricks or a pound of feathers?” Neither…they both a pound!! You still fail to realize that FACT.

And to be quite honest, under a gold standard the crash would likely be far worse. I am sure you do realize that the Great Depression was also an “all-out system collapse that comes at the end of multi-decade credit/bailout boom” and I am also sure that you realize that the destitution and poverty then were at least 10 times worse than what we are experiencing now in ours. Case in point.

Having a fiat system does NOT mean that we condone or support the creation of bubbles and bailouts (I hate the Bernake put!!!). At the same token having a gold standard does NOT mean that you prevent or buffer the terrible collapse of bubbles (just look at history for crying out loud). Credit still exists under a gold standard therefore crashes and bubbles and serious pain can, will, and do result. Period. End of statement. This is not about monetary systems…it’s about people and decisions being made. You seem to think that GREED, FEAR, AND CORRUPTION will somehow be “tamed” by a gold standard, however you seem to fail to realize that such a constraint effects everyone in that economy equally, therefore you have made NO CHANGE relatively speaking. You have only “tightened the box” if you will. But the relationships and relative values are all still the same. In short it makes zero logic to do that. The only way it could possibly work is to constrain those that are greedy and corrupt with a gold standard while freeing all those that are innocent and pure. But that is basically impossible.

It’s the IDEAS that fuel crashes, bubbles, and bailouts that remain regardless of the system. Under a gold standard we’ve only limited our resources making the fall still just as inevitable only now it’s even more painful b/c we have chosen to put ourselves into a straight-jacket.

Please, I’d love to hear your responses to these very apt and pertinent comments as well as how a gold standard PREVENTS crashes and bubbles and bailouts from happening in a way that cannot be accomplished under a fiat system (aka regulation, credit-worthiness, representation, etc.). Please note that I say “prevents crashes, bubbles, and bailouts” b/c if it doesn’t prevent them from happening (a true cure for them) then they will happen again anyway and when they do we will all be even worse off, making the whole point for going back to a gold standard not only moot but actually destructive. This is logical thinking as far as I can see. Your comments (or anyone’s) would be much appreciated.

I apologise if it appears contradictory, but re-reading what I said it, appears that you are doing more speaking about my ideas than I did and are putting words into my mouth.

I need not repeat my words verbatim, as they are above for all to see untouched.

The Gold Standard prevents/ makes harder bailouts.
It does not prevent bad investments and therefore it does not prevent, or eliminate, defaults and deflation.
However by avoiding bailouts by a fairy-godparent, it means that the banking/credit system has a different failure profile.

fair enough. I can see what you’re saying there. However how much “smaller” are gold standard busts really? And for those of us who are financially responsible (not swept up into bubbles) are we punished more repeatedly rather in such a system. Also wouldn’t such repetitive failures make for a more depressed society overall both in terms of confidence as well as in terms of progress?

I think a far superior solution lies in proper market regulations in the fiat regime. Why not have less-frequent and smaller busts if at all possible? It really wasn’t until we ditched the gold standard that our country really boomed and our standard of living, even today, is far better than ever before in our history and likely the history of all mankind generally speaking. I think that has to count for a lot more than what Austirans are giving it.

Also just a question…do you think it would be more realistic to accomplish and sustain a change in market regulations under our fiat system OR a change to the gold standard as well as market regulations? I think mathematically speaking the answer would be the former don’t you think?

Also are you referring to a 100% backed gold standard or a fractional standard? Do you think this makes any difference in the potential efficacy of the gold standard’s function? And finally, how much of a perpetual decrease in the money supply do you suspect we’d see from a 100% backed gold standard currency and/or a fractional gold standard?

hutrade – After the period of “really booming”,comes the period of “really busting”.

Apologies but I won’t answer your questions. Mostly, because I do not have the answers. Instead, I will ramble and hope that it makes a bit of sense in explaining (even if only to myself) my beliefs, thoughts and opinions on this Austrian/MMT debate. [doffing my cap to Edwad, here]

I think that once one differentiates between ‘money’ – government liabilities and ‘credit’ – banking/financial system liabilities then one can see the differences in the potential scenarios.

If the Government/Central Bank was to be constrained by a gold standard (hard-money) it would be no worry to me (at least) if the banking/finance system was fractional or full – as the irresponsible bankers would fail and The Government could not bail them out.

The “free-marketeer in me” would prefer that deposit-taking banks could be fractional-reserved or fully-reserved and realistically that this could be a differentiator – let the customer choose: a bit like islamic banking, I guess. Yes, I know, it sounds crazy!

Clearly – all other things being equal – I would be less-inclined to put all my hard-earned money in a bank with less, rather than more, reserves; however, I could – as I have the choice – spread my money across a range of banks with different reserving policies. Hopefully there would be full-reserve banks in this veritable ecology of banks. Oh yes – this would require getting rid of deposit insurance as well!

Under a monetarily-constrained sovereign all ‘economic downturns’ would be “harder”. I simply allege that the absence of the “Central Banker’s Put” would make the Banking System behave itself.

Now if one was to have a monetarily-unconstrained soveriegn then I think one has to be ‘hard’ on the banking/credit system. Yes, regulations form a critical part in this “hardness”. However “The Austrian in me” knows that this will be whittled away with time. another option would be that banking should have more of their own skin in the game and that they should be private partnership affairs.

My instincts are to move towards any system where bailouts do not occur as I am a firm believer in ‘incentives’ governing behaviour. That[No Bailouts], however, is a political hot potato that I believe a democracy will always shy away from. Fact of life – we all can’t be Austrian!

The “Engineer in me” says that one should not ‘over-focus’ on how a system might work, but rather on how it can fail. The better design (if you subscribe to this idea) is the one that fails ‘more safely’. The Austrians are ‘correct’ in this regard in constraining or banning central banking, in my opinion. However, they are to Monetary Economics & Banking what The Temperance Society is to College parties.

Regardless, the MMT framework and the approach of stock-flow-consistent modelling allows one to look at an unconstrained (Chartalist), a constrained (Austrian), or even no (free banking/circuitist) “banker of last resort”. All fail (and work) differently when we take into account how people actually behave rather than how they should behave. I do agree with The Chartalists is that we should model what we have (soft money) and not model what we ‘should’ have (hard money).

Ramble over.

Anonymous says 8 years ago

I hear ya man. All cool. One major setback with a gold standard is the same thing that you consider to be its advantage…in other words if we had wanted to help out consumers…the people…in the gfc instead of helping out the banks/corps we wouldn’t be able to.

Just b/c we helped out some evil person with medical aide instead of helping out the people that really need it, does not mean logically it would be smart to just limit our total supply of medical aide…just to avoid us helping evil people in the future.

The logic is not fully realized in such a stance, and for that reason I can’t support it. How do you think our currency and economy would be handling the huge drops in silver last week? I don’t think it’d be doing too well imho. Cheers mate.

Anonymous says 8 years ago

and it’s not true that the great depression was a smaller bust, but are you considering that a “fiat” bust b/c of fractional reserve lending? I assume so but am not sure if that’s true for you. If it is then I assume you only support a 100% backed gold standard correct?

Anonymous says 8 years ago

I’m in the MMT camp, but I also believe that having fiat money in the economy CAN lead to continuous malinvestments and endless bubbles. It’s just that I view this as a purely political problem, not a monetary problem.

If the people don’t like how their government chooses to spend, the solution is to elect new leaders, not to change the monetary system in hopes of creating meaningful fiscal/monetary restraint. As long as we elect politicians who support endless war and powerful banking cartels, we will get endless war and powerful banking cartels, regardless of whether our currency is fiat or backed by gold.

Anonymous says 8 years ago

ummm….do people really think bad investments cannot happen under a gold standard or something? I really feel as if people aren’t thinking logically with this stuff. Having a gold standard only shrinks the money supply and thereby only makes the bad investments which WILL HAPPEN that much worse b/c there will be even more constraint on funds and liquidity and fiscal power. I’d love to hear an Austrian counter these functional REALITIES somehow….

No-one implies that bad investments cannot be made under a gold or commodity standard. My own view is that bail-outs become infinitely harder as The Government cannot do its usual magic.

By allowing failure to happen (more) frequently you ward off the all-out system collapse that comes at the end of a multi-decade credit/bailout boom. Also there is the factor that as credit money is destroyed by defaults etc., the cost of money is more likely to increase due to market forces rather than decrease due to government interaction.

Where no entity controls the supply of money – say a gold or a pure credit money system – we are assured of smaller, more frequent bush-fires rather than the all-out combustion of the majority of the forest.

Anonymous says 8 years ago

thanks for your reply Ebipere. However I don’t think you realize that your argument keeps jumping back and forth and you actually back-pedal on yourself into contradiction.

First you state that you admit that bad investments (aka bubbles and crashes) can still be made under a gold standard. However once you admit that you then just dive right back into that same type of thinking and say that imposing a constraint allows us to “ward off the all-out system collapse that comes at the end of multi-decade credit/bailout boom.” Umm…you just contradicted yourself.

Do you think that a bubble and/or crash is “better” under a gold standard or “better” under a fiat system? Trick question!! They are both bubbles and crashes!! It’s like that question, “which is heavier…a pound of bricks or a pound of feathers?” Neither…they both a pound!! You still fail to realize that FACT.

And to be quite honest, under a gold standard the crash would likely be far worse. I am sure you do realize that the Great Depression was also an “all-out system collapse that comes at the end of multi-decade credit/bailout boom” and I am also sure that you realize that the destitution and poverty then were at least 10 times worse than what we are experiencing now in ours. Case in point.

Having a fiat system does NOT mean that we condone or support the creation of bubbles and bailouts (I hate the Bernake put!!!). At the same token having a gold standard does NOT mean that you prevent or buffer the terrible collapse of bubbles (just look at history for crying out loud). Credit still exists under a gold standard therefore crashes and bubbles and serious pain can, will, and do result. Period. End of statement. This is not about monetary systems…it’s about people and decisions being made. You seem to think that GREED, FEAR, AND CORRUPTION will somehow be “tamed” by a gold standard, however you seem to fail to realize that such a constraint effects everyone in that economy equally, therefore you have made NO CHANGE relatively speaking. You have only “tightened the box” if you will. But the relationships and relative values are all still the same. In short it makes zero logic to do that. The only way it could possibly work is to constrain those that are greedy and corrupt with a gold standard while freeing all those that are innocent and pure. But that is basically impossible.

It’s the IDEAS that fuel crashes, bubbles, and bailouts that remain regardless of the system. Under a gold standard we’ve only limited our resources making the fall still just as inevitable only now it’s even more painful b/c we have chosen to put ourselves into a straight-jacket.

Please, I’d love to hear your responses to these very apt and pertinent comments as well as how a gold standard PREVENTS crashes and bubbles and bailouts from happening in a way that cannot be accomplished under a fiat system (aka regulation, credit-worthiness, representation, etc.). Please note that I say “prevents crashes, bubbles, and bailouts” b/c if it doesn’t prevent them from happening (a true cure for them) then they will happen again anyway and when they do we will all be even worse off, making the whole point for going back to a gold standard not only moot but actually destructive. This is logical thinking as far as I can see. Your comments (or anyone’s) would be much appreciated.

I apologise if it appears contradictory, but re-reading what I said it, appears that you are doing more speaking about my ideas than I did and are putting words into my mouth.

I need not repeat my words verbatim, as they are above for all to see untouched.

The Gold Standard prevents/ makes harder bailouts.
It does not prevent bad investments and therefore it does not prevent, or eliminate, defaults and deflation.
However by avoiding bailouts by a fairy-godparent, it means that the banking/credit system has a different failure profile.

fair enough. I can see what you’re saying there. However how much “smaller” are gold standard busts really? And for those of us who are financially responsible (not swept up into bubbles) are we punished more repeatedly rather in such a system. Also wouldn’t such repetitive failures make for a more depressed society overall both in terms of confidence as well as in terms of progress?

I think a far superior solution lies in proper market regulations in the fiat regime. Why not have less-frequent and smaller busts if at all possible? It really wasn’t until we ditched the gold standard that our country really boomed and our standard of living, even today, is far better than ever before in our history and likely the history of all mankind generally speaking. I think that has to count for a lot more than what Austirans are giving it.

Also just a question…do you think it would be more realistic to accomplish and sustain a change in market regulations under our fiat system OR a change to the gold standard as well as market regulations? I think mathematically speaking the answer would be the former don’t you think?

Also are you referring to a 100% backed gold standard or a fractional standard? Do you think this makes any difference in the potential efficacy of the gold standard’s function? And finally, how much of a perpetual decrease in the money supply do you suspect we’d see from a 100% backed gold standard currency and/or a fractional gold standard?

hutrade – After the period of “really booming”,comes the period of “really busting”.

Apologies but I won’t answer your questions. Mostly, because I do not have the answers. Instead, I will ramble and hope that it makes a bit of sense in explaining (even if only to myself) my beliefs, thoughts and opinions on this Austrian/MMT debate. [doffing my cap to Edwad, here]

I think that once one differentiates between ‘money’ – government liabilities and ‘credit’ – banking/financial system liabilities then one can see the differences in the potential scenarios.

If the Government/Central Bank was to be constrained by a gold standard (hard-money) it would be no worry to me (at least) if the banking/finance system was fractional or full – as the irresponsible bankers would fail and The Government could not bail them out.

The “free-marketeer in me” would prefer that deposit-taking banks could be fractional-reserved or fully-reserved and realistically that this could be a differentiator – let the customer choose: a bit like islamic banking, I guess. Yes, I know, it sounds crazy!

Clearly – all other things being equal – I would be less-inclined to put all my hard-earned money in a bank with less, rather than more, reserves; however, I could – as I have the choice – spread my money across a range of banks with different reserving policies. Hopefully there would be full-reserve banks in this veritable ecology of banks. Oh yes – this would require getting rid of deposit insurance as well!

Under a monetarily-constrained sovereign all ‘economic downturns’ would be “harder”. I simply allege that the absence of the “Central Banker’s Put” would make the Banking System behave itself.

Now if one was to have a monetarily-unconstrained soveriegn then I think one has to be ‘hard’ on the banking/credit system. Yes, regulations form a critical part in this “hardness”. However “The Austrian in me” knows that this will be whittled away with time. another option would be that banking should have more of their own skin in the game and that they should be private partnership affairs.

My instincts are to move towards any system where bailouts do not occur as I am a firm believer in ‘incentives’ governing behaviour. That[No Bailouts], however, is a political hot potato that I believe a democracy will always shy away from. Fact of life – we all can’t be Austrian!

The “Engineer in me” says that one should not ‘over-focus’ on how a system might work, but rather on how it can fail. The better design (if you subscribe to this idea) is the one that fails ‘more safely’. The Austrians are ‘correct’ in this regard in constraining or banning central banking, in my opinion. However, they are to Monetary Economics & Banking what The Temperance Society is to College parties.

Regardless, the MMT framework and the approach of stock-flow-consistent modelling allows one to look at an unconstrained (Chartalist), a constrained (Austrian), or even no (free banking/circuitist) “banker of last resort”. All fail (and work) differently when we take into account how people actually behave rather than how they should behave. I do agree with The Chartalists is that we should model what we have (soft money) and not model what we ‘should’ have (hard money).

Ramble over.

Anonymous says 8 years ago

I hear ya man. All cool. One major setback with a gold standard is the same thing that you consider to be its advantage…in other words if we had wanted to help out consumers…the people…in the gfc instead of helping out the banks/corps we wouldn’t be able to.

Just b/c we helped out some evil person with medical aide instead of helping out the people that really need it, does not mean logically it would be smart to just limit our total supply of medical aide…just to avoid us helping evil people in the future.

The logic is not fully realized in such a stance, and for that reason I can’t support it. How do you think our currency and economy would be handling the huge drops in silver last week? I don’t think it’d be doing too well imho. Cheers mate.

Anonymous says 8 years ago

and it’s not true that the great depression was a smaller bust, but are you considering that a “fiat” bust b/c of fractional reserve lending? I assume so but am not sure if that’s true for you. If it is then I assume you only support a 100% backed gold standard correct?

“The best way The best way to control politicians and bankers from abusing it is to strictly enforce macroprudential monitors and controls.

While I respect your right to opinion, there is no way to “control politicians and bankers” or anyone else for that matter – that is, not with any certainty’

Gold (and Silver) is the only way to set a monetary Standard of a human nature that will ensure market correction and punishment for market manipulation and abuses. We human just cannot be trusted and those of reference are the most corruptible.

“The best way The best way to control politicians and bankers from abusing it is to strictly enforce macroprudential monitors and controls.

While I respect your right to opinion, there is no way to “control politicians and bankers” or anyone else for that matter – that is, not with any certainty’

Gold (and Silver) is the only way to set a monetary Standard of a human nature that will ensure market correction and punishment for market manipulation and abuses. We human just cannot be trusted and those of reference are the most corruptible.

Virgil0211 says 8 years ago

Actually, I’ve found different Austrian economists proposing different versions of what you describe. I think it’s a matter of degree of preference. For example, a gold-standard currency is better than a fiat currency because the possibility of defaulting on the currency, thus possible political upheaval, would prevent the government from expanding the money supply too much. 100% reserve banking in a national banking system (like what we have today) is better than what we have right now as the fractional reserve system carries too much potential to increase the money supply, thereby increasing interest rates faster than normal, and setting up the economy for another boom-bust episode. Beyond this, they posit that a competitive market in both currency and banking is superior to both. For one, it means that they don’t need to force a banking standard/currency on anyone, people can gravitate toward the most economically beneficial version of either. If a currency begins to inflate too much, they can switch to another. Banks that are able to balance themselves between full reserve and fractional reserve according to market risk will be the ones that thrive, and it’s likely that a competitive market would arise to fill the gap left by the FDIC. It’s less taking away the ability of the government and banks to create currency, and more taking away their ability to artificially inflate currency.

Of course, this is just my interpretation based on the conversations I’ve had with Austrian school economists. I could be wrong.

Don’t be too hard on them, though. They’re a big part of the reason I got interested in economics in the first place.

Virgil0211 says 8 years ago

Actually, I’ve found different Austrian economists proposing different versions of what you describe. I think it’s a matter of degree of preference. For example, a gold-standard currency is better than a fiat currency because the possibility of defaulting on the currency, thus possible political upheaval, would prevent the government from expanding the money supply too much. 100% reserve banking in a national banking system (like what we have today) is better than what we have right now as the fractional reserve system carries too much potential to increase the money supply, thereby increasing interest rates faster than normal, and setting up the economy for another boom-bust episode. Beyond this, they posit that a competitive market in both currency and banking is superior to both. For one, it means that they don’t need to force a banking standard/currency on anyone, people can gravitate toward the most economically beneficial version of either. If a currency begins to inflate too much, they can switch to another. Banks that are able to balance themselves between full reserve and fractional reserve according to market risk will be the ones that thrive, and it’s likely that a competitive market would arise to fill the gap left by the FDIC. It’s less taking away the ability of the government and banks to create currency, and more taking away their ability to artificially inflate currency.

Of course, this is just my interpretation based on the conversations I’ve had with Austrian school economists. I could be wrong.

Don’t be too hard on them, though. They’re a big part of the reason I got interested in economics in the first place.